Where are Property Prices Going
The crazy world
economics continues to plague us all. As a one-time student of
economics at the University of Oxford I can only sit here and
marvel at what I regard as total lunacy. I am, however, not in
Where are we? Is it possible to work out how far it is to the
A year ago I thought we were within eighteen months of another
crash, but the system is holding up. The people who are closer
to the decision makers than I am are increasingly moving towards
panic mode. One consistently correct analyst claims we are still
two or three years away from the big drop as he calls it.
There is hardly a government that is solvent anywhere on the
planet. Emerging economies have borrowed in dollars only to find
the dollar has appreciated in value and therefore they owe
considerably more money than they previously thought. The major
economies are on the edge of a bust. And Europe is still on the
The EU is not recovering. Not only is Greece still on the floor,
but the other delinquent countries are heading the same way. The
only way out for Greece is to go bust and leave the euro. Of the
forty-five or so reforms they were supposed to set in motion,
less than a third have been even started, and they have already
run out of bailout funds. The situation is beyond a farce. How
long can this go on? It's already way past the end.
The current situation is unsustainable. I am not going into the
gory details, you can find them almost anywhere on the web, Iíll
just point out that when things get this way there are serious
problems which are going to affect the property markets.
We have two stages to this: the first is deflation, which is
where we are now, and that is set to continue with China
unwinding a massive debt and investment strategy that has led to
over-production of things that no-one needs, or is prepared to
buy. We also have a currency war being fought around the world
whereby countries are trying to devalue their currencies to make
their exports cheaper, and thus attempt to stimulate their
There is a further complication in that banks are now becoming
sidelined. This, when we have a banking crisis, is going to
begin the marginalisation of the traditional bank.
I have started investing in more property. I am doing this with
companies that have been set up precisely for this purpose over
the course of the past two years. Before 2008 a property
developer would source a project and then come up with the seed
capital, and then take the proposition to the bank for further
funding. This doesnít happen nowadays. There are various forms
of crowd-funding. The most obvious is to use a company that sets
up the finance from private individuals, and they all share the
security, and the payout upon completion of the project.
In such a scenario the bank has become an irrelevant middleman.
Why invest with the bankís money which comes with a surrender of
the deeds, and an interest payment? You can buddy-up with a
dozen or so other people each with your own seed capital, get a
share of the deeds, and pay no interest. Who needs a bank?
You get no interest for keeping your money in the bank, so why
keep it there? I have a Paypal account. I used to regularly send
the balance to my bank. One day I sat at my computer and asked
myself the simple question: Why the heck am I doing this
With the roll out of blockchain technology many more
transactions will progressively do away with so many middlemen
and ancillary organisations. You wonít need a bank to use
Bitcoin, or any digital transaction. You will use the blockchain
technology. That will also eliminate property lawyers,
accountants, and a whole host of hangers-on. Some drastic
changes are coming, and they arenít that far away.
I am doing my own conveyancing now. I used to do it years ago,
but found so many solicitors refused to deal with me, and so
gave it up. I am now finding solicitors have to deal with me. In
five years time I suspect conveyancers will start heading
towards the labour exchange. They will serve no useful purpose.
Of course, the change-over will take time, but anything the
blockchain can do will be the death-knell for that profession.
The only reason I use a bank, or transactional lawyers and
accountants is simply because the alternative is not yet
main-stream. I suspect in five yearsí time we will have reached,
or be rapidly approaching, critical mass.
In any case, who wants to risk being at the wrong end of a
bail-in? No-one with any sense of value will be keeping money in
the bank. It is at risk of being sequestered (what is now called
a bail-in). In short, your savings are regarded as bank
collateral to be raided if the bank goes bust. So you get no
interest on the capital, and it isnít even safe. Who is going to
keep more than emergency funds in a bank under those
Simply put, banks, in their current format, are history.
We are about to enter a new financial world. I think it will
only happen once the expected financial cataclysm finally
erupts. For years, the big question has been: When? The answer
is still unknown, but it has to be very close. My own money is
on 2017. I wonít go into why I think that, although I hinted at
the reasoning when I discussed China a year ago.
There are several problems that are likely to come to a head
within the next twelve months. Within the next three or four
months we are going to see the beginnings of a massive default
in the US fracking system. Much too much money has been borrowed
to take advantage of the new technology on the basis of the then
oil price. Thatís halved. Too many fracking concerns are
bleeding money, and wonít survive.
At the same time corporate bonds are looking dodgy, so are
municipal bonds in the US. To make matters even worse, the
dollar is appreciating, which makes so much emerging market
debt, which is denominated in US$, more expensive. Finally,
there is scarcely a government that isnít so heavily in debt
that any rise in interest rates will crash the whole system.
And I havenít mentioned the euro and the problems with Greece,
Portugal, and to a slightly lesser extent, Italy and Spain.
This mess will carry on until one day it will all unravel. I
have a feeling that the IMF and the Fed will try to hold it all
together until China has joined the SDR system. That is now
scheduled for next september. I suspect it wonít last much
longer after that, which means we have maybe another year before
everything starts to fall apart.
Of course, all this goes without saying that I have no crystal
ball, and my guess about when the collapse comes is no more than
that: a thoughtful guess.
The real question is: how do we cope? Thatís too large a
question for here, but the implications for real estate are
The received wisdom is that in a deflationary period you keep
cash; in an inflationary period you invest in solid stuff like
agriculture, transport, real estate, and precious metals.
We are not in any kind of sensible market place at the moment.
There is no earthly point in me suggesting what you should do.
There is also no point in trying to predict price movements. All
the normal questions are in suspense. Doing nothing is better
than doing the wrong thing. The sensible person will start to
reduce debt, hang on to real estate, and wait till the crash
comes. Then wait some more for the housing market to bottom out.
Then it will be time to back up the truck and buy. In order to
do that you will need that store of cash.
My view is that when the crash comes the price of just about
everything will implode. People will be frightened of real
estate, especially with the prospect of rising interest rates. I
shall be waiting for the crash to settle, and then I will buy as
much real estate as I possibly can. Iím in no hurry.